Research Administration Office

University of California

Enclosure 1 is a copy of a FAR clause at 52.219-16, titled "Liquidated Damages -- Small Business Subcontracting Plans (AUG 1989)." This clause is to be used in federal contracts that also contain the clause 52.219-9, Small Business and Small Disadvantage Business Subcontracting Plan. The latter is found in contracts over $500,000 that have subcontracting opportunities.

In essence, the liquidated damages clause subjects the contractor to possible penalties if it can be shown that the contractor failed to make good faith efforts to comply with its subcontracting plans. (Such subcontracting plans generally set goals for the award of a portion of subcontract dollars to small businesses and small disadvantaged businesses. For further information, see Contract and Grant Memo 84-14, Subcontracting Reporting Forms SF 294 and SF 295, dated May 1, 1984.)

The University's Materiel Management office requested an opinion on this clause from General Counsel's office. Enclosure 2 is a copy of a memo from Mary MacDonald to Dave Haskins. On the basis of this memo, we can advise Contract and Grant officers that the FAR clause 52.219-16 is acceptable.

This is in response to your memorandum dated August 29, 1989, requesting an opinion on whether the University would have to present every federal contract to the Board of Regents for approval since provisions of the Federal Acquisition Regulations require a prime contractor to pay liquidated damages upon a finding of a lack of good faith effort to meet its small business subcontracting goals. You expressed concern that this liquidated damages provision would constitute an unfunded liability which could not be accepted without approval by the Board.

In my opinion, the liquidated damages provision does not constitute an "obligation on the part of the University to expenditures or costs for which there is no established fund source." (Standing Order 100.4(dd)(1).) The potential for imposition of liquidated damages would not constitute an "obligation." The liquidated damages are not an automatically assessed monetary obligation, but apply only where the prime contractor (here, the University) fails to make a good faith effort to meet its small business subcontracting goals. If the University did not have a policy of identifying and making a good faith effort to subcontract with small businesses, my advice would be different because the imposition of liquidated damages would be a foregone conclusion. This is, however, not the case, to the best of my knowledge.